Thursday, September 10, 2015

"How the World’s Biggest Stock Hedge Fund Stayed a Secret"

From MoneyBeat:

How do you build the world’s biggest stock hedge fund? Call it something else.

As the Wall Street Journal reports today,
Adage Capital Management, led by former Harvard endowment executives
Robert Atchinson and Phillip Gross, now oversees $28 billion, more than
any of its stock-picking peers.

The quiet Boston firm’s penchant for secrecy hardly makes it an
outlier in the hedge-fund world. But its unusual practices do: Adage
only collects its 20% performance fee if it beats the S&P 500
including dividends (a so-called hurdle)—and it refunds up to half the
charge if it fails to keep pace in the subsequent year.

Adage is perhaps more suitable to that sort of practice because
Messrs. Atchinson and Gross at all points keep the portfolio fully
“net-long,” with a heavy emphasis on long bets over shorts, and keep
100% exposure to the S&P’s rise and fall. Most hedge funds pitch
themselves as less exposed, with 30-40% net exposure more typical to
keep performance from whipsawing along with the equity benchmark.

By yoking themselves closely to the S&P, however, Adage has also
successfully convinced investors, who include the endowments of Harvard
and the University of California, to allow it to wriggle into their
“long only” equity portfolios, rather than shunting it off in the much
smaller hedge-fund or alternatives categories.

Critics say the practice has the effect of adding costlier, more
complex investments which over time may underperform, but influential
consultants like Cambridge Associates have given the habit a stamp of
approval. A Cambridge executive declined to comment on any specific
advice given.

From that vantage, Adage is a relatively expensive substitute for
more passive investments like exchange-traded funds, rather than a
cheaper version of a hedge fund. Given the firm’s performance, beating
the S&P 500 by 3.27% a year on average over the past 14 years, many
investors don’t seem bothered. The firm hasn’t taken in new money in
years.

“We think: Let’s find managers who can produce excess returns without
any preconceived notions of filling buckets,” said Scott Chan, senior
managing director at the University of California’s endowment. “They’re
not this one, two or three-trick pony. They didn’t call the market turn
here or there—they’ve just picked stocks over a long period of time.
That’s really rare.”...MORE